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Sample Assignments

1. You have won a free ticket to see a Sonu Nigam concert (which has no resale value). YO YO Honey
Singh is performing on the same night and is your next best alternative activity. Tickets to see Honey
Singh cost 400. On any given day, you would be willing to pay up to 500 to see Honey Singh. Assume
there are no other costs of seeing either performer. Based on this information, what is the opportunity cost
of seeing Sonu Nigam? (a) 0, (b) 100, (c) 400, or (d) 500
2.
a. Suppose sugar has the demand curve P = 50 - 5Q and the supply curve P = 5Q. Compute the
equilibrium price and quantity and show graphically. Calculate the consumer surplus and
producer surplus associated with this outcome.
b. What factors might cause the equilibrium price and quantity of sugar to change?
c. Suppose that the government imposes a price cap of 20. Show the effect graphically and
calculate the resulting consumer surplus, producer surplus and deadweight loss.
3. Suppose Product A has the demand function QA = 10 - 5PA + 2PB + 0.01I. The initial values of the
variables are QA = 15, PA = 4, PB = 2.5 and I = 2,000.
a. When PA moves to 3.4, keeping other variables at their initial values, QA becomes 18. What is
the corresponding own-price arc elasticity of demand?
b. If income, I, increases to $2,250 per period with all other variables held at their initial values, QA
becomes 17.5. What is the corresponding income arc elasticity of demand?
c. If PB increases to 3 with all other variables held at their initial values, QA becomes 16. What is
the corresponding cross-price arc elasticity of demand?
d. Is Product A an inferior or normal good? Are Product A and Product B substitutes or
complements? Explain.
e. Is the firm charging the revenue maximizing price for Product A at the initial values? Explain.
f. Compute the MR at the initial values.
4. Engineers at Mahindra Plant built a prototype automobile run on solar power that could be driven 200
Km on full recharge. They estimated that in mass production the car would cost 6,00,000 per unit to
build. The engineers argued that Government should force Indian automakers to build this energyefficient car.
a. Is energy efficiency the same thing as economic efficiency? Explain.
b. Under what circumstances would the energy-efficient automobile described here be economically
efficient?
c. If the goal of society is to get the most benefit from its limited resources, then why not ignore
economic efficiency and build the energy-saving automobile?
5. The demand and supply curves are as follows:
QD = 10 - 0.5PD
= {

0, < 2
},
2 + , 2

where QD is the quantity demanded when the price consumers pay is PD, and QS is the quantity supplied
when the price producers receive is PS. The last line of the supply equation indicates that nothing will be

supplied if the price producers receive is less than 2 per unit. Thus, for prices between zero and 2, the
supply curve lies on the vertical axis.
a. What are the equilibrium price and quantity?
b. Suppose the government imposes an excise tax of 6 per unit. What will the new equilibrium
quantity be? What price will buyers pay? What price will sellers receive?
c. Suppose the government provides a subsidy of 3 per unit. Find the equilibrium quantity, the price
buyers pay, and the price sellers receive.
d. Suppose the government imposes a price ceiling of 6 in the market.
I.
What is the size of the shortage in the market with the price ceiling? What is the producer
surplus?
II.
What is the maximum consumer surplus, assuming the good is purchased by consumers
with the highest willingness to pay? What is the net economic benefit? What is the
deadweight loss?
III.
What is the minimum consumer surplus, assuming the good is purchased by consumers
with the lowest willingness to pay? What is the net economic benefit? What is the
deadweight loss?
6. The Flipkart is the only supplier of a particular type of Oriental carpet. The estimated demand for its
carpets is: Q = 112,000 500P + 5M; where Q = number of carpets, P = price of carpets (rupees per unit),
and M = consumers income per capita.
The estimated average variable cost function for Flipkarts carpets is: AVC = 224 0.0105Q.
Consumers income per capita is expected to be 20,000 and total fixed cost is 100,000.
a.
b.
c.
d.

How many carpets should the firm produce to maximize profit?


What is the profit-maximizing price of carpets?
What is the maximum amount of profit that the firm can earn selling carpets?
Answer parts a through c if consumers income per capita is expected to be 30,000 instead.